Decoupling, Stupid

16 06 2010

One way the utility business works like the rest of the economy is that it sells its products/commodities at a price that is higher than the cost of production, on average.  The more utilities sell, the greater their gross profit.  This is at odds with utilities’ incentive to save energy with energy efficiency programs.  As a result, some utility executives are opposed to energy efficiency programs.  That is a short-sighted view but that’s a story for a different day.

As a result of this dichotomy, a pricing mechanism known as decoupling has been developed.  This NREL paper gives a pretty good overview.   It says simply that “Decoupling is a rate adjustment mechanism that breaks the link between the amount of energy a utility sells and the revenue it collects to recover the fixed costs of providing service to customers.”  There are a number of specific ways to do this, some of which are described in the NREL paper, but the bottom line is utilities are less reliant on sales for their well being.

This may seem like an ingenious idea, but I see a lot of significant, if not major hang-ups.  One of the benefits is reported to be price and revenue stability.  But here’s the problem as I see it: revenue stability equals profit volatility.  Take the lousy economy we’ve had the last couple years.  Utility sales are way down but the utility keeps collecting bills that are closer to the long term averages, which means prices increase (if I know math, and I think I do).  They are selling less but there is this decoupled “fixed” cost pasted to customers’ bills.  Good for them.  What about the customers?  They are cutting back on everything due to wage pressures, layoffs, production cutbacks, and lower profits.  So what do they get in return?  A higher energy costs per unit purchased, just what they don’t need.

The opposite is also true.  Say we get a really hot summer.  Now the utility has to sell, and generate or purchase a lot more energy.  In this case, a lot might be 10% more, but that has a huge effect on price.

I just watched a demand response webinar.  Demand response incentivizes customers to cut back during peak periods when energy costs are very high because everything but homeowner’s Honda generators are putting power on the grid.  One way to deliver demand response is to pass the cost of putting the last kilowatt of power on the grid.  I don’t know where the last kW comes from for sure, but it’s way expensive and for good reason.  As full capacity is reached, power generators (companies) either charge the arm of your first born or we get brown outs.  So when the utility passes this cost to the customer the cost is huge, like 5-10 times normal cost.  Peak power is very expensive.

Back to the hot weather.  Now the utility has to sell all this really expensive electricity with less ability to recover (1) the extra high price of electricity and (2) the larger volume of energy delivered.  I suppose if you have real-time pricing described above, this will be mitigated.  But many states including MN and WI have decoupling pricing mechanisms in place, but practically no demand response or real time pricing.  The decoupling in MN and WI is news to me, but if NREL says so, it must be true.

So it seems to me that decoupling presents at least as many and as big of problems as it solves.  Did Washington come up with this?

When I interview with job candidates I usually explain the utility market and why energy efficiency programs are implemented –to keep costs down by delaying or avoiding the construction of power plants, poles and wires.  Again, it seems to me decoupling is at odds with this because the intent is to protect revenue, not prices.  If you protect revenue the “societal” benefits would seem to be lower to me.

In general, not just talking about utilities, decoupling supply and demand is a horrible idea.  Despite all the political bomb throwing regarding healthcare, the number one cause of soaring healthcare costs, which continues to go unaddressed, is the decoupling of premiums and services rendered.  For decades the system worked like this: pay a flat rate and consume all you want.  It doesn’t take a genius to predict what will happen.  In California, they kinda sorta deregulated the electricity market last decade.  They decoupled generation from delivery, deregulated wholesale prices for the utilities but capped consumer prices.  Result: utility bankruptcies and the Governator in a recall election.

I am not saying decoupling is going to result in any sort of disaster like these examples, but messing with Econ 101 supply and demand is almost never a good idea.  If we want to protect revenue, why not just build it into the rate case.  Societal benefits may take the same hit, but at least customers pay for what they consume, “real time”.

If we want to control consumption and keep prices in check, we need all the market effects of supply, demand, and pricing that we can get.  A complete free for all would go too far for a bunch of reasons I’ll save for another day, but we need more pricing response, like demand response described above, not less.

written by Jeffrey L. Ihnen, P.E., LEED AP

Green Will Follow, Then Lead

26 01 2010

Some of the American Recovery and Reinvestment Act (ARRA or “stimulus”) targets energy efficiency and green jobs training.  Wisconsin just announced $2 million in green jobs training.  Oregon: $6 million.  First off, I’m skeptical of these curricula.  Who will be teaching?  What is the curriculum?  At a cost of about $6,000 per graduate, it’s close to one year of in-state tuition and fees at a public university.  Wow.

Who is going to attend these courses?  I would say a significant portion would be laid off construction workers and skilled trades workers.  Once they are trained to weatherize homes, which does require training, no question about it, they will be ready.  But maybe in a year “real” jobs will return, and do you think a construction worker who can make $50k per year will keep weatherizing homes?  I doubt whether home weatherization can compete with that.  But I digress.

The purported goal of these programs is jobs – green jobs.  These jobs will lead us out of the economic funk we’re in.  I disagree.  The green jobs will really begin to flourish once and if the economy ever recovers.

We need a strong economy to spur construction.  We have a design division and within our energy division, we have a sustainability group that provides new construction design assistance and LEED® consulting services.  These would be considered high paying, long term jobs but as the economy is in the tank, these core services have ground to a slow crawl.  These were “green” jobs before green was a color.  Fortunately, our services are sufficiently diversified that we can keep relatively busy backfilling our other service areas.  Other firms aren’t so lucky.  Unemployment among architect, engineering and construction workers is running nearly double the national average.

Furthermore, with the economy in the tank, energy demand is down.  If you don’t believe it, just ask utility employees who are forced to take unpaid furloughs.  With shriveled demand, who needs energy programs?  Sure, in the short term this will have no effect.  If there is a long term, these programs may lose favor with the public, which is and will be squeezing every penny.  I’m sure we have a long grace period per the currently popular “green jobs” movement.

A strong economy will revive construction and manufacturing and this in turn will put pressure on energy supply, prices, and infrastructure; the drivers for demand side management programs and energy efficiency (not to mention the A&E and construction industries).  It will also put money in public and private institutions’ pockets to spend on energy retrofit and energy efficient new construction.  THEN green jobs will really emerge, organically – how about that!

A strong economy will also move institutions from deer in the headlights / survival mentality to a more competitive mindset.  Once this occurs, green will be a key ingredient to the competitive edge and it will lead the way in differentiating product A from product B, retailer 1 versus retailer 2, or A&E firm α from A&E firm β.

written by Jeffrey L. Ihnen, P.E., LEED AP

Policy to Curb Carbon

8 12 2009

Any carbon-reduction policy that includes paying Washington for permits to emit carbon is the wrong way to go.  Why?  Two words.  Social Security.

Washington has no spending restraint.  Earmark nation is alive and thriving.  Everyone has heard of the Social Security Trust Fund; Al Gore’s “lock box”.  Social Security has been running surpluses in the hundreds of billions of dollars per year for a long time.  If you think your payroll taxes are piling up for your retirement in a bunker under Washington somewhere, you are sorely mistaken.  Our profligate government has been taking the surplus and spending it on everything else, leaving behind “IOUs”.  Those IOUs are worth less than the lint behind my dryer because they will never be paid off.

What’s the point?  Permit revenue (tax) is supposed to be used for R&D for new fuel and fuel efficiency technologies, energy efficiency and so forth, per these bills.  Like social security and the state of Wisconsin’s disaster (see Energy Efficiency Oversight rant), this revenue will be pilfered for any number of other things including, for example, a congressman’s airport, a senator’s library, a study of mating habits of insects, why hog farms smell and so forth.

Instead, the drive to reduce utility-related carbon should come from utility and regulatory administered state programs, where consumers’ money spent to fund the reduction is plowed directly back into energy efficiency and low carbon production of energy.  Regulators and consumer advocacy groups ensure consumers get their moneys worth through independent program evaluations.

Yes.  I think that is the role of government.  To help ensure people don’t get ripped off.  If the feds get the money, who is going to watch them?  They have a dismal record of self-policing.  In fact, they practice bookkeeping methods that would land corporate accountants in jail.  Imagine if a corporation took employees’ contributions to their 401ks, replaced it with corporate bonds and called it revenue (ala the Social Security raid).  Without this switcheroo (watch the hand), those surpluses from the 1990’s were actually deficits.

Thanks to Wisconsin, we have a case study in failed government takeover of energy programs.  Let’s demand to avoid this scenario by ensuring Washington only gets the lint behind the dryer to control carbon.

written by Jeffrey L. Ihnen, P.E., LEED AP